The
appeals before the Supreme Court arose out of an order of the National Company
Law Appellate Tribunal (“NCLAT”) dated 1.8.2019 whereby the NCLAT had
reversed the decisions of the National Company Law Tribunal, Allahabad Bench (“NCLT”),
the later of which (dated 16.5.2018) was rendered on an application under
Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC”/
“Code”) for avoidance of certain transactions as being preferential,
undervalued and fraudulent. The decisions of the NCLT, dated 9.5.2018 and
15.5.2018, were rendered on a challenge to rejection by the Interim Resolution
Professional (“IRP”) of claims by mortgagees of certain assets of the
corporate debtor to be considered as financial creditors of the Corporate
Debtor.
Jaiprakash
Industries Limited (“JIL”) was the corporate debtor in respect of which
the Corporate Insolvency Resolution Process was pending, an application under
Section 7 of the Code having been admitted by the NCLT. Jaiprakash Associates
Limited (“JAL”) held 71.64% equity in JIL. Certain mortgages were
created by JIL over its assets in favour of the lenders of JAL to secure the
debt due to the said lenders from JAL. It was these mortgage transactions that
were sought to be declared preferential, undervalued and fraudulent by way of
an application filed by the IRP before the NCLT, which application came to be
allowed on 16.5.2018.
It
was also based on the said mortgages created by JIL in favour of the lenders of
JAL, that the lenders of JAL claimed to be financial creditors of JIL. The IRP opined
that there was no relationship of debtor and creditor between JIL and the said
lenders, and therefore they could not be termed financial creditors of JIL. The
challenge to this opinion of the IRP was rejected by the NCLT vide its Orders
dated 9.5.2018 and 15.5.2018.
The
appeals against the aforesaid Orders of the NCLT appear to have been heard
together, and have been decided by a common order dated 1.8.2019.
The
NCLAT allowed the appeal of the lenders against the NCLT Order dated 16.5.2018.
Further, vide the common order, the NCLAT also allowed the appeals against the
NCLT Orders dated 9.5.2018 and 15.5.2018 without assigning any reasons for such
decision whatsoever.
The
appeals before the Supreme Court were filed by the IRP (aggrieved by the
reversal of the decision of the NCLT qua Sections 43, 45 and 66) and certain
associations of homebuyers of JIL which supported the IRP’s appeal. A financial
creditor of JIL, India Infrastructure Finance Company Limited (“IIFCL”),
assailed the reversal of the NCLT Orders dated 9.5.2018 and 15.5.2018.
Arising
from these appeals, two important questions of law have been deliberated upon
and decided by the Hon’ble Supreme Court in this Judgment, viz.,:
1. What is the scope of Section 43
of the Code?
2. Whether a mortgagee of the
corporate debtor, who is not owed any financial debt by the corporate debtor,
can be termed as a ‘financial creditor’ of the corporate debtor?
Key Findings and Conclusions on Section 43 of the Code (the First Issue)
1. The Supreme Court held that
‘intent’ is not a defence open to the respondent in an application under
Section 43 of the Code. The Court referred to Section 328 of the Companies Act,
2013 which dealt with ‘fraudulent preference’ and with Section 329 which dealt
with ‘transfers not in good faith’. It was found that in the Code, Section 49
dealt with transactions intended at defrauding the creditors, while Section 66
dealt with fraudulent or wrongful trading. It was thus found that on account of
the deeming provision in Section 43 of the Code, once the transaction was found
to be within the co-ordinates defined in the said provision, a ‘preference’
shall be deemed, and ‘intent’ would thus become irrelevant. It was held so on
account of the legal fiction created by the wording of Section 43(2), so that
the transactions which fit within the conditions specified therein would be
presumed to be preferential transactions, even though they may not be so in
reality and irrespective of whether the transaction was in fact intended or
even anticipated to be so.
2. In view of the drastic
consequences that ensue from the Orders passed under Section 44 of the Code, it
was held that these provisions ought to be construed strictly. The Court held
thereafter that notwithstanding the principle of strict construction, the
‘underlying principles and object’ could not be lost sight of. It was held that
the construction ought to be such that leads towards achieving the objects of
the provisions.
3. With the aforesaid conclusion
forming the bedrock of the decision, the Supreme Court held that the impugned
mortgages had to be examined from this perspective, viz., that the mortgages
created an ultimate benefit in favour of JAL, by securing the loans extended by
the lenders in favour of JAL. In the facts, it was also held that JAL was a
related party and creditor of JIL and that JIL owed antecedent financial debts
to JAL.
4. An interesting argument was urged
on behalf of the lenders on the ‘look-back’ period under Section 43. It was
urged that in view of the fact that the provision provided for a look-back
period of 2 years (in case of related parties) and 1 year (in other cases),
Section 43 could not be said to have come into force until expiry of at least 1
year after the enactment of the Code. Any other interpretation would give
retrospective effect to these provisions, which would be impermissible. The
decision of the Supreme Court in Purbanchal Cables and Conductors (P) Ltd.
v. Assam S.E.B.
was relied upon. The Court rejected the aforesaid argument while holding that
Section 43 did not essentially create a ‘new liability’ as in the case of Purbanchal
Cables (supra), since provisions dealing with such transactions were
already dealt with in the Companies Acts of 1956 and 2013. Secondly, it was
held, that a reading of the Code did not support the conclusion that the
provision, in spite of having been enacted, remained in hibernation until the
expiry of the look-back period of 1 year or 2 years.
5. The RP urged the Court to
consider the word ‘or’ occurring in Section 43(3)(a) as ‘and’, i.e.
conjunctively and not disjunctively. It was submitted that in the event that
this provision was read textually, and the words ordinary course of business
were held to be relatable to either the corporate debtor or the
transferee, it would enable lenders to accept third party mortgages to secure
their debts to the detriment of other
lenders of the corporate debtor, and the mere fact that the same is in the
ordinary course of business of the first lender, would take it outside the
ambit of ‘preferential transactions’. The Supreme Court agreed with this
submission on behalf of the RP. This interpretation was also found to be
consistent with the object of the Code.
6. The Court relied upon a decision
of the High Court of Australia in Downs Distributing Co. Pty. Ltd. v.
Associated Blue Star Stores Pty Ltd (in liq)
to hold that the words ‘ordinary
course of business’ mean that the transaction must fall into place as part of
the undistinguished common flow of business done, and that it must not arise
out of a special or particular situation. Applied to the facts, it was held
that creation of a mortgage to secure the loan extended to the holding company
JAL, could not be said to be in the ordinary course of business of JIL, the
corporate debtor.
7. The Court then proceeded to set
out a procedure to be followed by the Resolution Professional while examining
transactions from the perspective of Section 43.
The Court thereafter observed that Sections 43, 45 and 66 of the Code
contemplated enquiries of different kinds, and that therefore, a composite
application under the three provisions ought not to have been preferred by the
RP. The Court observed:
“….We
are not elaborating on all these aspects for being not necessary as the
transactions in question are already held preferential and hence, the order for
their avoidance is required to be approved, but it appears expedient to observe
that the arena and scope of the requisite enquiries, to find if the transaction
is undervalued or is intended to defraud the creditors or had been of wrongful/
fraudulent trading are entirely different. Specific material facts are required
to be pleaded if a transaction is sought to be brought under the mischief
sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As
noticed, the scope of enquiry in relation to the questions as to whether a
transaction is of giving preference at the relevant time, is entirely
different. Hence, it would be expected of any resolution professional to keep
such requirements in view while making a motion to the Adjudicating
Authority…..”
Having
arrived at the aforesaid conclusions on the applicability of Section 43 of the
Code to the transactions in question, the Hon’ble Court found it unnecessary to
enter into the questions of applicability of Sections 45 and 66 of the Code.
The Supreme Court has thus expressly left the questions of law (of
interpretation of Sections 45 and 66) open for decision in an appropriate case.
Key Findings and Conclusions on the Second Issue
The
second issue arising in the matter was as to whether certain lenders of JAL
could also be considered the financial creditors of JIL, basis the creation of
the mortgages on the assets of JIL so as to secure the facilities granted to
JAL. The discussion on this aspect is prefaced by the Court’s observation that
in view of the decision on the first issue, and the approval of the order of
the Adjudicating Authority qua the consequences flowing therefrom, viz., the
avoidance of the transactions under Section 44, the second issue did not
require any deliberation.
The
argument on behalf of the RP as well as IIFCL was that the mere fact that JIL
had mortgaged an asset as collateral security for the loan extended by the
lenders to
JAL, could not lead to the conclusion that the said lenders were owed a
‘financial debt’ within the meaning of Section 5(8) of the Code, since there
was no ‘disbursal against the time value of money’ as required under the
said provision. It was argued, inter alia¸ based on the meaning of the
terms mentioned in the said provision, that there was no actual ‘disbursal’ of
money to JIL by the lenders, and that there was certainly no disbursal for
‘time value of money’ since JIL was not a borrower of the said lenders in any
event. Further, it was argued that the transaction between JIL and the said
lenders was a mere transaction of mortgage and could not be said to be a
guarantee.
Per
contra, the lenders argued that the existence of a mortgage presupposes the
existence of a debt, and that mortgage can only have reference to a debt. The
transaction was one akin to a contract of guarantee under Section 126 of the
Contract Act, 1872. Heavy reliance was placed by the lenders on the decision of
the Supreme Court in Pioneer Urban Land and Infrastructure Limited v. Union
of India & Ors.to
contend that the definition of ‘financial debt’ under Section 5(8) of the Code
had been expanded by the said decision.
The
Court’s observations and conclusions are summarized below:
1. After an extensive analysis of
the decisions of the Supreme Court in Committee of Creditors of Essar Steel
through Authorised Signatory v. Satish Kumar Gupta
and Pioneer Urban in the context of the words ‘financial debt’ and
‘financial creditor’ dealt with therein, the Court held that for the definition
of ‘financial debt’ to apply, the essential part of the defining clause (viz.,
disbursal against time value of money) must be seen to exist. The word ‘means’
ensures this. It was held that the word ‘includes’ occurring in the definition
could not be held to include categories which did not satisfy the essential
condition as aforementioned.
2. The Court further held that the
definition of the financial debt is in the context of the corporate debtor.
Thus, in order for a person to be a financial creditor, he must be owed a debt
by the corporate debtor itself.
3. The Court further analysed the
definitions of secured creditor in Section 3(30) and security interest in
Section 3(31), in the context of the decision of the Supreme Court in Swiss
Ribbons Private Limited and Anr. v. Union of India and Ors.and
held that every secured creditor of the corporate debtor could not be assumed
to be a financial creditor of the corporate debtor, for the simple reason that
a secured creditor was merely interested in recovery of its dues through its
secured interest, and was not interested in the rejuvenation, revival and
growth of the corporate debtor, as a financial creditor would be.
4. The Supreme Court rejected the
reliance of the said lenders on the observation in Essar Steel to the
effect that the ‘secured creditors as a class are subsumed in the category
of financial creditors’. It was held that the observation could not be
relied upon as the ratio of the decision of the Supreme Court, and also that
the reference to secured creditors therein could only be meant to refer to the
direct secured creditors of the corporate debtor, i.e. those creditors who had
lent money to the corporate debtor.
5. The lenders had placed reliance
upon a decision of the Gujarat High Court in State Bank of India v. Smt.
Kusum Vallabhdas Thakkar
for the proposition that JIL owed them a mortgage debt as a guarantee
obligation, which debt fell within the ambit of financial debt under Section
5(8) of the Code. The Court held that the said decision could not be relied
upon in view of the specific exclusion of ‘mortgage’ from the definition of
financial debt under Section 5(8) of the Code, and especially since the
disbursement against consideration for time value of money was an essential
element of the said provision. In view of the aforesaid findings, the Supreme
Court has thus specifically overruled the decision of the NCLAT in SREI Infrastructure
Finance Limited v. Sterling International Enterprises Ltd.
Based on the above findings and conclusions, the Hon’ble Supreme Court
set aside the decision of the NCLAT in entirety and restored the decisions of
the NCLT.
It is submitted that this decision of the Supreme Court goes to a great
extent in clarifying several aspects of the Corporate Insolvency Resolution
Process. The decision lays down a detailed procedure to be followed by the
resolution professional in dealing with situations warranting resort to Section
43.
As observed by the Court, drastic consequences flow from the Orders
passed under Section 44, which makes wise judgment on the part of the
resolution professional extremely critical.
It was hoped that the decision would provide similar exposition of
another crucial provision, viz., Section 66 of the Code, which was also in
question in the facts.
While it cannot be gainsaid that many applications under Section 66 are
pending across several NCLTs in the country, it appears that the practitioners
in the field will have to further await a decision of the Supreme Court for the
last word on the subject.
It is most respectfully submitted that the Hon’ble Court has resorted to
purposive interpretation of the statute without pointing to any ambiguity in
the plain meaning of the provisions. It is settled law that purposive
interpretation can be resorted to only if there exists any ambiguity in the
language of the statutory provisions, or if it leads to absurd results [See,
inter
alia,
Giridhar G. Yadalam v. CWT & Anr. 2015(17)SCC664].
Applying the strict rule of construction (which as a matter of fact has been
held applicable by the Hon’ble Court) to Section 43(2), it is humbly submitted
that a different conclusion could be arrived at qua interpretation of the
provision in view of the words ‘
for or on account of’ occurring before
the words ‘
an antecedent financial debt…’ therein.
It
is respectfully pointed out that the Hon’ble Court’s attention does not seem to
have been drawn to Regulation 35A of the Insolvency and Bankruptcy Board of
India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
(inserted vide an Amendment dated 3.7.2018) which reads as follows:
“35A.
Preferential and other transactions.
(1) On
or before the seventy-fifth day of the insolvency commencement date, the
resolution professional shall form an opinion whether the corporate debtor has
been subjected to any transaction covered under sections 43, 45, 50 or 66.
(2)
Where the resolution professional is of the opinion that the corporate debtor
has been subjected to any transactions covered under sections 43, 45, 50 or 66,
he shall make a determination on or before the one hundred and fifteenth day of
the insolvency commencement date, under intimation to the Board.
(3)
Where the resolution professional makes a determination under sub-regulation
(2), he shall apply to the Adjudicating Authority for appropriate relief on or
before the one hundred and thirty-fifth day of the insolvency commencement
date.”
It is respectfully
submitted that the requirements and the timelines prescribed under Regulation
35A form an integral part of the overall scheme of things in Section 43.
The lenders of JAL who argued to be included as financial creditors of JIL were
Axis Bank, Standard Chartered Bank, Central Bank of India and Bank of
Maharashtra; as discernible from the Judgment
Order dated 13.3.2019 in M.A. No. 1584/2019 in C.P. No. 402 of 2018
